Looking why the EURUSD has just gone berserk? Here is the reason - another barrage of flashing red headlines out of Italy:
- MONTI ACCEPTS OFFER TO FORM ITALIAN GOVERNMENT
- MONTI ANNOUNCES CABINET MEMBERS
- MARIO MONTI TELLS PRESIDENT HE WILL LEAD NEW ITALIAN GOVERNMENT
- MARIO MONTI TO BE FINANCE MINISTER IN NEW GOVERNMENT
- INTESA CEO PASSERA NAMED ITALY DEVELOPMENT, TRANSPORT MINISTER
- MONTI NAMES GNUDI MINISTER
- MONTI NAMES PIERO GIARDA MINISTER
- MONTI NAMES NAMES PASSERA MINISTER
Yet across the Alps this is the only headline that matters:
- MERKEL ECB DOESN'T HAVE OPTION TO SOLVE EURO PROBLEMS
Kyle Bass Best Summarizes The "Profligate Idiots" In Europe: "They Have A German Pope And An Italian Central Banker"Submitted by Tyler Durden on 11/15/2011 22:38 -0400
Anyone needing a quick summary of the main tension lines in Europe as they currently stand can probably not do any better than the attached 3 minute explanation by Kyle Bass. And while he just participated in a far longer Q&A with BBC's Hardtalk program, which we will bring to you shortly, the attached video explains more in 150 seconds than a full day of watching the financial funny channel from basic cable. In a nutshell: Europe is about to see trillions in debt written down (the only mathematical explanation which makes sense, as presented for the nth time earlier by Charles Hugh Smith), the "profligate idiot" spenders of Southern Europe are not going to be bailed out by Germany, which has decided it has had enough of the "Mexican standoff" within the Eurozone, and will not be held by the short hairs any longer. And as for the quote that captures the total and utter chaos in Europe: "they have a German pope and an Italian central banker." Nuf said.
Following a relatively quiet overnight session which despite various bond auctions in Europe did not see any flagrant contagion, and in which ongoing ECB buying of Italian bonds led the 10 Year BTP spread back to 6.75%, things have taken a very quick turn for the worse once again, and the BTP is now back at the day wides at 7.10%, following the following Reuters headline which is rather self explanatory: RTRS-UNICREDIT CEO, IN MEETING WITH ECB, TO ASK FOR MORE ACCESS TO ECB FUNDING FOR ITALIAN BANKS BY WIDENING TYPE OF COLLATERAL USED-SOURCE CLOSE TO BANK. Hmmmmm, UniCredit....where is that name familiar from. Oh wait, that's right - it was, once again, the top name on yesterday's Sigma X report of most actively traded companies by Goldman's special clients. Good to see there was no leakage here at all, none. And making things worse across the Mediterranean is the rumor that LCH Clearnet will promptly follow suit, and hike Spanish margins now that the spread to German Bunds is over 450 bps. Bottom line: Same Europe, Different Day. Here is our perfectly uneducated guess - market plunge in the morning in which institutions dump, ramp in the afternoon in which retail and HFTs buy.
The good news is that on 8 November the International Energy Agency released its 2011 “World Energy Outlook.” While it will cheer nuclear advocates, overall the report makes for grim reading. Pulling no punches, the report states at the outset, “There are few signs that the urgently needed change in direction in global energy trends is underway.” Stripped of its cautious language, the IEA report essentially noted that should present trends continue, the world’s governments through a lack of progressive initiative embracing alternative energy sources would continue to rely on ‘tried and true” fossil fuels, resulting in increased pollution, more fossil-fuel dependency and increasingly upward energy prices. For environmentalists, this is all good news, but the report contained a caveat virtually anathema to all green movements, that accordingly, governments should reconsider their reluctance to embrace nuclear power, as it does not generate greenhouse gases. Like many discussions in Western economies since 2008, when the global recession first began to draw blood, the issue of reliable energy production ultimately devolves down to dollars and cents issues. The grim reality for environmentalists is that no single renewable energy resource, from wind power to solar energy through biofuels, has remotely become competitive with kilowatt hours of electrical energy generated by coal or oil-fired power plants. The debate pits those opposed to a transition to greener technologies to those considering the bottom line, despite greenhouse gas emissions.
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Does not compute
Earlier we warned everyone that the Goldman stop loss triggers were if not hot then would be any minute. That just happened and the EURUSD tumbled a good 40 pips in seconds as soon as the several supporting bids just below 1.35 were finally eradicated, bringing the Euro to a 5 week low. And as a reminder, tomorrow we have some very interesting Spanish and French bond auctions (for full list see here). As another reminder, both closed at record spreads. Better set that alarm for 2:45 am: things are getting dramaminy once again.
The primary reason for today's (and last week's) dramatic overnight market weakness was the fact that several auctions, either Italian, or Spanish, went off about as badly as they possibly could. But luckily that's over, right: all the auctions in the near term are over and there is nothing to worry about for at least a few more days so traders don't have to get up at 3 am Eastern to see just how abysmally bad the latest Italian Bill issuance was? Uhm, no. Below we present the balance of Europe's bond auctions for November, for December... oh, and Bills as well, because apparently issuing 3 Month paper in Europe is about as difficult as selling 30 Years.
Two weeks ago we reported with sheer disgust that the outgoing CEO of bankrupt Freddie Mac, Ed Haldeman, was to pocket over $4 million for his brief two year stay at the nationalized GSE, which money was to reward him for lots of hard work collecting bail out cash from the Treasury. $21 billion to be precise. Apparently it is not easy to beg from Tim Geithner which explains the compensation for a task which is essentially supervising a financial black hole with an attached run off portfolio. Nonetheless the optics of this farce are rather unpleasant which is why we said that this is the (one of many) reason "why people in America are very, very pissed." Today Congress, which has yet to ban itself from trading on inside information, has decided to at least rectify this one sticking point, and moved forward with a "bill to block multimillion-dollar executive pay packages at Fannie Mae and Freddie Mac even as their regulator defended them as necessary to retain top talent and limit taxpayer losses at the bailed-out companies." And where are they going to go: MF Global? Morgan Stanley? RBS? Jefferies? As for what new pay wil be: "The committee adopted an amendment that would use the pay scale that applies to independent financial regulators, such as the Federal Deposit Insurance Corp, which allows for higher pay than at most federal agencies. Representative Al Green, who offered the amendment, said this would have the effect of limiting the highest salaries to about $260,000 per year." While still about 3 times more than what they deserve, this is a good start. And an even better one would be to if not unwind the GSEs, then to at least recognize that their $7 trillion in debt should be counted toward the US Federal debt, as Peter Orzsag suggested once. Naturally were that to happen US total debt/GDP would be over 150%, and the bond vigilantes would suddenly be confused whether their time is not better spent on this side of the Atlantic. Yet the biggest twist in this story, is that not only are the GSEs bankrupt, but as the NYT reported earlier, the FHA itself has a "close to 50% chance of requiring a bailout." Add to that that the corporate retirement guys (PBGC) and the post office (USPS) are now effectively broke as well, and very soon being the CEO of a bankrupt company will be the new killing it.
Following our earlier post, equities retreated and converged towards the reality of their credit cousins in the last 30 minutes to end only marginally higher (or practically unchanged by futures close). A 30pts rally off the overnight lows was far and beyond the performance of credit markets which never traded green all day but it was EUR weakness (USD strength) that was intriguing given the rally in PMs and commodities. Gold and Silver are very marginally lower on the week while Copper is up around 1% but it was Oil's outperformance on the day that was impressive as the gentle roar of printing presses was heard on both sides of the Atlantic (noting Brent in EUR trades at the top of its nine month channel). Implied correlation diverged (upwards) from VIX into the close suggesting macro overlays were more bid - which reflects also the bid for protection in CDS markets - and signals far less risk appetite than the headlines (until the last few minutes) suggested.
Not quite the outcome expected by the shower-impaired crowd:
- OCCUPY WALL STREET' PROTESTERS BARRED FROM PARK, JUDGE RULES
- OCCUPY WALL STREET' PROTESTERS RESTRAINING ORDER DENIED
- NEW YORK JUDGE RULES AFTER POLICE FORCIBLY REMOVED PROTESTERS
So... now what?
Say you are the CEO of Deutsche Bank (whoever that may be these days following Ackermann's stunner of an announcement yesterday), and you have so much dirty laundry that if the market so much as looks at you funny, you know very well it is game over the second you have to engage in reactionary damage control. After all your assets are 84% if not more, of total German GDP and there is no way that you can be bailed out by one country alone, even if that country is the only one that is not a complete Banana republic. So what do you do? Why you tell your bankers to write the best, most persuasive pitch book they can come up with, addressed to none other than Goldman Sachs alum and ECB head, Mario Draghi, and you tell him the truth: "Europe has hit its Tipping Point" and it is now or never. In other words, in 51 slides, your task is to convince the ECB that unless they terminally break away with their traditional stance of not monetizing, not only they, but the entire European status quo will cease existing. And that's precisely what you do. Behold: "The Tipping Point - Time To Call The ECB" - Deutsche Bank's definitive attempt to encapsulate the Mutual Assured Destruction that we are "certainly" all going to suffer, unless the ECB prints, and prints, and prints. The bottom line, you would tell Draghi, is "do nothing, and pull the cord now; or do something, risk hyperinflation which may or may not come, but at least extend and pretend for a few years." And one wonders why Crude is about to pass $100...
For years Zero Hedge has been exposing the persistent fraud that goes on behind the trading scenes, not only in High Frequency Trading, but also in various dark trading venues, known better as dark pools where exchanges, typically the banks themselves get to match buyers and sellers without any indication of a trade having occurred, until much later if at all. Recently, and very much as we expected, trading firm Pipeline was smacked down by the SEC for gross violation of customer orders, an offense which can be summed up simply as: frontrunning. We now learn that, as the Wall Street Journal reports, Pipeline is pretty much finished after the Chairman and CEO have both quietly left the sinking ship. The WSJ adds: "The case was the SEC's first enforcement action involving dark pools, and it shocked the trading community, according to traders and other operators of electronic-trading systems. People who know Messrs. Berkeley and Federspiel said they were highly regarded among their peers. Mr. Berkeley was a former president and vice chairman of the Nasdaq Stock Market. Mr. Federspiel once worked at the Los Alamos National Laboratory as a nuclear physicist." Well, we certainly were not shocked, having predicted the demise of dark pools as early as the summer of 2009. What will shock the trading community, however, even more is if the SEC decides to go after not some tiny unknown firm, but the real dark pool transgressors, the biggest one of which is and has always been Goldman's Sigma X. Of course for that to happen, Mary Schapiro would actually have to do her job. And that, unfortunately, ain't happening.
loss-absorbing capital to levels specified by regulators. They’re doing this especially to hit the level of 9% core capital-as-a-percentage of risk-weighted assets that the regulators require as a response to the most recent stress tests. While actually selling loans and exposures would be one way to achieve this so-called “risk-weighted asset optimization”, it looks like many banks are actually just choosing to fiddle around with the internal, self-created risk models that both the current Basel II and the not-so-new-and-improved Basel III regulatory regimes allow them to use. Yes, these regulatory regimes allow the banks to decide, for themselves, how risky their loans are. Which of course then drives how much or how little loss-absorbing capital they must hold. Don’t worry, though, because the regulators approve the models on a yearly basis. And which banks have taken advantage of this so far?